Energy price cap change set to drive up inflation

Inflation is poised to have risen back above the UK’s official 2 per cent target rate last month, underscoring the resistance of price pressures that could be bolstered if Donald Trump launches a protectionist trade policy agenda.
Figures published by the Office for National Statistics on Wednesday are expected to show that inflation rose to as high as 2.2 per cent from 1.7 per cent in the 12 months to September.
The increase is likely to have been driven by a 10 per cent rise in the energy price cap to £1,717 which took effect in October. The ONS is also expected to say that food items and communication products, like first-class stamps, pushed up the headline inflation rate over the past month.
The October inflation reading will influence whether the monetary policy committee (MPC), the nine-member Bank of England panel that sets interest rates every six weeks, votes to lower borrowing costs or keep them unchanged at its next meeting on December 19.
According to economic forecasts published this month, the Bank of England thinks that annual CPI inflation ticked up to 2.2 per cent in October. Services inflation — a measure of domestic price pressures that is closely watched by the central bank — could jump to 5 per cent from 4.9 per cent, the Bank believes.
At its meeting on November 6, the MPC voted 8-1 in favour of cutting the base rate by 25 basis points to 4.75 per cent from 5 per cent, having lowered it for the first time in four years in August by the same magnitude.
Rachel Reeves’s inaugural budget in October could push up inflation and growth in the short term, the Bank of England said this month, owing to the £70 billion of additional government spending she announced.
The chancellor lifted the main rate of employers’ national insurance contributions by 1.2 percentage points to 15 per cent and lowered the threshold when it kicks in to £5,000 from £9,100. Businesses including Sainsbury’s and BT have said the tweaks may prompt them to lift prices to offset a higher tax bill.
Andrew Bailey, the governor of the Bank of England, said it would be incorrect to assume that “that the path for interest rates will be very different due to the budget”. Financial markets think that the UK base rate will fall to about 3.75 per cent by the end of next year.
Economists have warned that Trump, the incoming 47th president of the United States, poses an inflationary threat to the UK if he decides to impose tariffs of up to 20 per cent on all goods imports. Trump is likely to extend corporate and personal tax cuts enacted during his first term as president.
However, Andrew Goodwin, chief UK economist at Oxford Economics, a consultancy, downplayed the impact of a protectionist policy agenda launched by Trump on the UK economy.
“Predicting Trump’s behaviour is very difficult, particularly when it comes to tariffs. But even our most extreme scenario — a ‘full-blown Trump presidency’ in which large tariff increases are applied across the board — would have a relatively small impact on UK GDP growth and inflation,” Goodwin said.
In a note to clients, Simon French, the head of research and chief economist at Panmure Liberum, the investment bank, said: “For all the risks to trade from enhanced trade protectionism, the UK has a relatively low level of direct exposure, whilst the data suggests that the first Trump term did little to influence global growth or trade volumes in aggregate.”